8-K/A 1 erf_8ka1-122807.txt ERF WIRELESS UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K/A Amendment No. 1 CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of Report (Date of earliest event reported) October 17, 2007 ERF Wireless Inc. ----------------- (Exact name of registrant as specified in its charter) Nevada 76-0196431 ------ ---------- (State or other jurisdiction (IRS Employer of incorporation) Identification Number) 000-27467 --------- (Commission File Number) 2911 South Shore Boulevard, Suite 100, League City, Texas 77573 --------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (281) 538-2101 -------------- (Registrant's telephone number, including area code) Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instructions A.2 below): |_| Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |_| Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |_| Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |_| Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) ITEM 2.01. COMPLETION OF ACQUISITION OR DISPOSITION OF ASSETS On October 17, 2007, ERFW completed the purchase of substantially all the assets from Momentum Online Internet Services, Inc., and Momentum Online Computer Services, Inc. (the "Business"). The assets purchased include substantially all of the assets associated with the Internet operations of Momentum including the current customer base, inventory, equipment, contract rights, vehicles, Internet address space, general intangibles and wireless broadband equipment infrastructure comprising the network that covers approximately 3,200 square miles in a geographic area covering five counties in Central Texas, including Llano, Burnet, Gillespie, Blanco and Comal counties. The asset purchase agreement required ERFW to pay aggregate consideration of $1,200,000 plus the assumption of certain operating liabilities. These liabilities include all of the liabilities: (i) arising in connection with the operation of the Business by the Subsidiary after the Closing date, (ii) arising after the Closing date in connection with the performance by the Subsidiary of the contracts and agreements associated with the Business assigned to Subsidiary, including the ISP Subscriber Contracts, office lease and utilities in effect pertaining to the Business, equipment and tower leases, and the Equipment Purchase, Monitoring and Maintenance Agreements in existence with customers, (iii) accounts payable outstanding or accrued as of the closing date as limited and subject to the adjustments set forth in section 1.7 - Adjustments to Purchase Price, (iv) the $122,127.59 Blanco National Bank note # 11073 (3-year amortization), and (v) the Century Van and truck note(s) for $11,923. At the time of the transaction, there were no material relationships between the Seller and ERFW or any of its affiliates, or any director or officer of ERFW, or any associate of any such officer or director. The sole purpose of this Amendment 1 to Form 8-K dated October 23, 2007, is to file such required financial information in accordance with item 9.01. ITEM 9.01 FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS (a) FINANCIAL STATEMENTS OF BUSINESS ACQUIRED. See Item 9.01(a) attached herewith. EXHIBIT 99.1 - Audited Financial Statements of Momentum Online Computer Services, Inc. For the years ended December 31, 2006 and 2005 and Unaudited Financial Statements of Momentum Online Computer Services, Inc., for the nine months ended September 30, 2007 (b) PRO FORMA FINANCIAL INFORMATION. See Item 9.01(b) attached herewith EXHIBIT 99.3 - Pro Forma Consolidated Balance Sheets for ERFW and Momentum Online Computer Services, Inc., at September 30, 2007; Pro Forma Statements of Operations for ERFW and Momentum Online Computer Services, Inc., for the nine months ended September 30, 2007, and Pro Forma Statements of Operations for ERFW and Momentum Online Computer Services, Inc., for the year ended December 31, 2006. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. December 28, 2007 /s/ H. Dean Cubley ------------------------------- H. Dean Cubley Chief Executive Officer (Principal Executive Officer) REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ------------------------------------------------------- To the Board of Directors of Momentum Online Computer Services, Inc. Blanco, Texas We have audited the accompanying balance sheet of Momentum Online Computer Services, Inc. (the "Company") as of December 31, 2006, and the related statements of operations, shareholders' deficit, and cash flows for each of the years in the two-year period ended December 31, 2006. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Momentum Online Computer Services, Inc. as of December 31, 2006, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2006 in conformity with accounting principles generally accepted in the United States of America. /s/ LBB & Associates Ltd., LLP LBB & Associates Ltd., LLP Houston, Texas December 12, 2007 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS MOMENTUM ONLINE COMPUTER SERVICES, INC. BALANCE SHEETS SEPTEMBER 30, 2007, AND DECEMBER 31, 2006 ($ in thousands except share data) September 30, December 31, 2007 2006 (Unaudited) (Audited) ------------ ------------ ASSETS CURRENT ASSETS Cash and cash equivalents $ 21 $ 7 Accounts receivable 66 80 Allowance for doubtful accounts (12) (12) Inventories 8 4 ------------ ------------ Total current assets 83 79 ------------ ------------ PROPERTY AND EQUIPMENT Computers 24 21 Operating equipment 716 443 Vehicles 100 84 Furniture and fixtures 11 11 Less accumulated depreciation (418) (296) ------------ ------------ Total property and equipment 433 263 ------------ ------------ OTHER ASSETS 46 31 ------------ ------------ TOTAL ASSETS $ 562 $ 373 ============ ============ LIABILITIES AND SHAREHOLDERS' DEFICIT CURRENT LIABILITIES: Accounts payable $ 165 $ 164 Accrued expenses 48 31 Notes payable and current portion of long-term debt 49 63 Capital lease current portion of long-term debt 149 65 Deferred revenue 47 47 ------------ ------------ Total current liabilities 458 370 ------------ ------------ Advances payable related party 77 123 Notes payable long-term debt 98 101 Capital lease long-term debt 227 120 ------------ ------------ Total long-term liabilities 402 344 ------------ ------------ COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' DEFICIT: Common stock - $1.00 par value Authorized 10,000 shares Issued and outstanding at September 30, 2007 and at December 31, 2006 respectively 10,000 and 10,000 10 10 Additional paid in capital -- -- Accumulated deficit (308) (351) ------------ ------------ Total shareholders' deficit (298) (341) ------------ ------------ Total liabilities and shareholders' deficit $ 562 $ 373 ============ ============ See accompanying notes to financial statements. 1 MOMENTUM ONLINE COMPUTER SERVICES, INC. STATEMENTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006, AND YEARS ENDED DECEMBER 31, 2006 AND 2005 ($ in thousands except share data and loss per share) September 30, September 30, December 31, December 31, 2007 2006 2006 2005 (Unaudited) (Unaudited) (Audited) (Audited) ----------- ----------- ----------- ----------- SALES: Products $ 49 $ 80 $ 103 $ 77 Services 850 772 1,016 1,124 ----------- ----------- ----------- ----------- TOTAL SALES 899 852 1,119 1,201 ----------- ----------- ----------- ----------- COSTS OF GOODS SOLD: Products and integration services 236 226 299 415 Rent, repairs and maintenance 34 23 32 26 Salary and related cost 23 53 61 31 Depreciation 107 47 66 84 ----------- ----------- ----------- ----------- TOTAL COSTS OF GOODS SOLD 400 349 458 556 ----------- ----------- ----------- ----------- GROSS PROFIT 499 503 661 645 ----------- ----------- ----------- ----------- OPERATING EXPENSES: Selling, general and administrative 396 432 556 832 Depreciation 14 16 21 24 ----------- ----------- ----------- ----------- TOTAL OPERATING EXPENSES 410 448 577 856 ----------- ----------- ----------- ----------- LOSS FROM OPERATIONS 89 55 84 (211) ----------- ----------- ----------- ----------- OTHER INCOME/(EXPENSES): Interest expense (51) (18) (26) (17) Other income 5 (4) (4) 10 Loss on sale of assets -- -- -- (3) ----------- ----------- ----------- ----------- TOTAL OTHER INCOME (EXPENSE) (46) (22) (30) (10) ----------- ----------- ----------- ----------- NET INCOME (LOSS) $ 43 $ 33 $ 54 $ (221) =========== =========== =========== =========== See accompanying notes to financial statements. 2 MOMENTUM ONLINE COMPUTER SERVICES, INC. STATEMENTS OF SHAREHOLDERS' DEFICIT FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006, AND YEARS ENDED DECEMBER 31, 2006 AND 2005 ($ in thousands) Common Stock Additional Total ----------------------- Paid in Retained Shareholders' Shares Value Capital Earnings Deficit ---------- ---------- ---------- ---------- ---------- TOTAL SHAREHOLDERS' DEFICIT AS OF DECEMBER 31, 2004 10,000 $ 10 $ -- $ (184) (174) ---------- ---------- ---------- ---------- ---------- Net loss -- -- -- (221) (221) TOTAL SHAREHOLDERS' DEFICIT AS OF DECEMBER 31, 2005 10,000 10 -- (405) (395) ---------- ---------- ---------- ---------- ---------- Net Income -- -- -- 54 54 TOTAL SHAREHOLDERS' DEFICIT AS OF DECEMBER 31, 2006 10,000 10 -- (351) (341) ---------- ---------- ---------- ---------- ---------- Net Income -- -- -- 43 43 TOTAL SHAREHOLDERS' DEFICIT AS OF SEPTEMBER 30, 2007 (UNAUDITED) 10,000 $ 10 $ -- $ (308) $ (298) ========== ========== ========== ========== ========== See accompanying notes to financial statements. 3 MOMENTUM ONLINE COMPUTER SERVICES, INC. STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006, AND YEARS ENDED DECEMBER 31, 2006 AND 2005 ($ in thousands) September 30, September 30, December 31, December 31, 2007 2006 2006 2005 ------------- ------------- ------------- ------------- (Unaudited) (Unaudited) (Audited) (Audited) CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ 43 $ 33 $ 54 $ (221) ------------- ------------- ------------- ------------- Adjustments to reconcile net loss to net cash used by operating activities: Depreciation and amortization 121 63 87 108 Provision for bad debt expense -- -- -- 12 Decrease (increase) in accounts receivable, net 14 (21) (15) 56 (Increase) decrease in inventories (4) 4 -- 26 Increase (decrease) in accounts payable 1 (31) (17) (17) Increase (decrease) in accrued expenses 18 5 (13) 18 Increase (decrease) in deferred revenue -- -- -- (9) ------------- ------------- ------------- ------------- Total Adjustment 150 20 42 194 ------------- ------------- ------------- ------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 193 53 96 (27) ------------- ------------- ------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property and equipment (6) (19) (20) (56) (Increase) in other assets (15) (14) (21) -- ------------- ------------- ------------- ------------- NET CASH USED BY INVESTING ACTIVITIES (21) (33) (41) (56) ------------- ------------- ------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from financing agreements 122 30 30 157 Proceeds from related parties -- -- -- 24 Payment of debt obligations (153) (35) (45) (117) Payment on capital lease obligations (81) (14) (27) -- Payment on related party obligations (46) (6) (23) -- ------------- ------------- ------------- ------------- NET CASH USED BY FINANCING ACTIVITIES (158) (25) (65) 64 ------------- ------------- ------------- ------------- NET INCREASE (DECREASE) IN CASH 14 (5) (10) (19) CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE PERIOD 7 17 17 36 ------------- ------------- ------------- ------------- CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD $ 21 $ 12 $ 7 $ 17 ============= ============= ============= ============= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Net cash paid during the year for: Interest $ 51 $ 18 $ 26 $ 17 Income taxes $ -- $ -- $ -- $ -- See accompanying notes to financial statements. 4 MOMENTUM ONLINE COMPUTER SERVICES, INC. NOTES TO THE FINANCIAL STATEMENTS NOTE 1 - BASIS OF PRESENTATION NATURE OF THE COMPANY MOMENTUM ONLINE COMPUTER SERVICES, INC. (the Company), is a wireless internet service provider ("WISP") that services residential and business users that encompass a geographic area covering five counties or approximately 3,200 square miles in Central Texas. BASIS OF ACCOUNTING The Company maintains its accounts on the accrual method of accounting in accordance with accounting principles generally accepted in the United States of America. The accompanying financial statements of MOMENTUM ONLINE COMPUTER SERVICES, INC. have been prepared in accordance with accounting principles generally accepted in the United States of America. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the balance sheet. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS Cash and cash equivalents include cash and all highly liquid financial instruments with original purchased maturities of three months or less. ASSETS HELD UNDER CAPITAL LEASES Assets held under capital leases are recorded at the lower of the net present value of the minimum lease payments for the fair value of the leased asset at the inception of the lease. Amortization expense is computed using the straight-line method over the shorter of the estimated useful lives of the assets or the period of the related lease. ALLOWANCE FOR DOUBTFUL ACCOUNTS Earnings are charged with a provision for doubtful accounts based on a current review of collectibility of accounts receivable. Accounts deemed uncollectible are applied against the allowance for doubtful accounts. DEFERRED REVENUES Revenues that are billed in advance of services being completed are deferred until the conclusion of the period of the service for which the advance billing relates. Deferred revenues are included on the balance sheet as a current liability until the service is performed and then recognized in the period in which the service is completed. The Company's deferred revenues consist of billings in advance of services being rendered for its wireless broadband customers which, are deferred and recognized monthly as earned. The Company had deferred revenues of $47,000 as of September 30, 2007, and $47,000 as December 31, 2006. INVENTORIES Inventories are valued at the lower of cost or market. The cost is determined by using the Average Cost method. Inventories consist of table radios for wireless transmission and related parts. The company had inventories of $8,000 and $ 4,000 as of September 30, 2007, and December 31, 2006, respectively. PROPERTY AND EQUIPMENT Property and equipment are stated at cost less accumulated depreciation. Major renewals and improvements are capitalized; minor replacements, maintenance and repairs are charged to current operations. Depreciation is computed by applying the double declining balance and straight-line over the estimated useful lives which are generally three to seven years. 5 MOMENTUM ONLINE COMPUTER SERVICES, INC. NOTES TO THE FINANCIAL STATEMENTS Impairment losses are recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. No impairment losses have been recorded since inception. Depreciation expense was approximately $121,000 and $63,000 for the nine months ended September 30, 2007 and 2006, respectively, and $87,000 and $108,000 for twelve months ended December 31, 2006 and 2005, respectively. LONG-LIVED ASSETS We review our long-lived assets, which include intangible assets subject to amortization, for recoverability whenever events or changes in circumstances indicate that the carrying amount of such long-lived asset or group of long-lived assets (collectively referred to as "the asset") may not be recoverable. Such circumstances include, but are not limited to: o a significant decrease in the market price of the asset; o a significant change in the extent or manner in which the asset is being used; o a significant change in the business climate that could affect the value of the asset; o a current period loss combined with projection of continuing loss associated with use of the asset; o a current expectation that, more likely than not, the asset will be sold or otherwise disposed of before the end of its previously estimated useful life. We continually evaluate whether such events and circumstances have occurred. When such events or circumstances exist, the recoverability of the asset's carrying value shall be determined by estimating the undiscounted future cash flows (cash inflows less associated cash outflows) that are directly associated with and that are expected to arise as a direct result of the use and eventual disposition of the asset. To date, no such impairment has occurred. To the extent such events or circumstances occur that could affect the recoverability of our long-lived assets, we may incur charges for impairment in the future. REVENUE RECOGNITION The Company's revenue is generated primarily from the sale of wireless communications products and services including providing high-speed wireless broadband Internet services. The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable, and collectibility is probable. The Company recognizes product sales generally at the time the product is shipped. Concurrent with the recognition of revenue, the Company provides for the estimated cost of product warranties and reduces revenue for estimated product returns. Sales incentives are generally classified as a reduction of revenue and are recognized at the later of when revenue is recognized or when the incentive is offered. Shipping and handling costs are included in cost of goods sold. The Company primarily derives its revenues from providing high-speed wireless broadband Internet services. The Company recognizes revenue from these services in the period in which subscribers use the related service. INCOME TAXES-S CORPORATION The Company, with the consent of its shareholders, has elected under the Internal Revenue Code to be an S corporation. In lieu of corporation income taxes, the shareholders of an S corporation are taxed on their proportionate share of the Company's taxable income. Therefore, no provision or liability for federal income taxes has been included in the financial statements. FAIR VALUE OF FINANCIAL INSTRUMENTS The Company's financial instruments consist of cash and cash equivalents, inventory, accounts receivable and debt. The carrying amount of these financial instruments approximates fair value due either to length of maturity or interest rates that approximate prevailing market rates unless otherwise disclosed in these consolidated financial statements. 6 MOMENTUM ONLINE COMPUTER SERVICES, INC. NOTES TO THE FINANCIAL STATEMENTS RECENT ACCOUNTING PRONOUNCEMENTS In November 2004, the FASB ratified the consensus reached by the Emerging Issues Task Force ("EITF"), on Issue No. 03-13. "Applying the Conditions in Paragraph 42 of FASB Statement No. 144 on Determining Whether to Report Discontinued Operations." The Issue provides a model to assist in evaluating (a) which cash flows should be considered in the determination of whether cash flows of the disposal component have been or will be eliminated from the ongoing operations of the entity and (b) the types of continuing involvement that constitute significant continuing involvement in the operations of the disposal component. Should significant continuing ongoing involvement exist, then the disposal component shall be reported in the results of continuing operations or the consolidated statements of operations and cash flows. We are currently evaluating the premises of EITF No. 03-13 and will adopt it as required. In September 2006, the Financial Accounting Standards Board ("FASB") issued SFAS No. 157, Fair Value Measurements. SFAS No. 157 defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007. Management is currently evaluating the impact SFAS No. 157 will have on the Company's financial position, results of operations, and cash flows. In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities - including an amendment of FASB statement No. 115." This Statement permits all entities to choose, at specified election dates, to measure eligible items at fair value (the "fair value option"). A business entity shall report unrealized gains and losses on items for which the fair value option has been elected in earnings (or another performance indicator if the business entity does not report earnings) at each subsequent reporting date. Upfront costs and fees related to items for which the fair value option is elected shall be recognized in earnings as incurred and not deferred. If an entity elects the fair value option for a held-to-maturity or available-for-sale security in conjunction with the adoption of this Statement, that security shall be reported as a trading security under Statement 115, but the accounting for a transfer to the trading category under paragraph 15(b) of Statement 115 does not apply. Electing the fair value option for an existing held-to-maturity security will not call into question the intent of an entity to hold other debt securities to maturity in the future. This statement is effective as of the first fiscal year that begins after November 15, 2007. The Company is currently analyzing the effects SFAS 159 will have on the Company's financial condition and results of operations. NOTE 2 - NOTES PAYABLE, LONG-TERM DEBT AND CAPITAL LEASES (000,s) September 30, December 31, Terms Maturity Date Interest Rate 2007 2006 ------------------------------------- ------------- ------------- ------------- ------------ Blanco National Bank $3,241 / Month including interest March-10 8.75% $ - $ 107 Blanco National Bank $392 / Month including interest March-07 8.50% - 1 Blanco National Bank $3,913 / Month including interest August-10 9.50% 116 - Century Van and Trucks $517 / Month including interest September-09 13.97% 11 - Blanco National Bank LOC 1 year / Quarterly interest (See below) July-07 10.25% - 30 Balboa Lease $208 / Month including interest June-10 21.41% 5 - Varilease $967 / Month including interest March-08 17.22% 5 13 Agility Capital Lease Various - see capital lease footnote Various 18.82% 366 172 Toyota Motor Credit $648 / Month including interest June-10 3.90% 20 26 ------------- ------------ Total debt 523 349 ------------- ------------ Less current maturities 198 128 ------------- ------------ Long-term debt $ 325 $ 221 ============= ============ The gross maturities of these debts as of September 30, 2007, are $48,000, $203,000, $203,000 and $69,000 for the years ended December 31, 2007, 2008, 2009 and 2010, respectively. 7 MOMENTUM ONLINE COMPUTER SERVICES, INC. NOTES TO THE FINANCIAL STATEMENTS In March 2005, the company financed an 8.75% installment note to a Blanco National bank, secured by operating equipment, payable in monthly installments of $3,241 including interest and is guaranteed by a shareholder. The note was repaid during 2007. In March 2004, the company financed an 8.50% installment note to a Blanco National bank, secured by operating equipment, payable in monthly installments of $392 including interest and is guaranteed by a shareholder. The note was repaid during 2007. In September 2007, the company financed a 9.50% installment note to a Blanco National bank, secured by operating equipment, payable in monthly installments of $3,913 including interest and is guaranteed by a shareholder. In September 2007, the company financed a 13.97% installment note to Century Van and Trucks, secured by the vehicle, payable in monthly installments of $517 including interest and is guaranteed by a shareholder. In July 2007, the company entered into a Letter of Credit of $30,000 to Blanco National Bank to construct wireless network towers for a banking center. The Letter of Credit is due and payable within one year from the date of the note with interest at 10.25% and is guaranteed by a shareholder. The note was repaid during 2007. In July 2005, the company financed a 3.9% installment note to a Toyota Motor Credit, secured by the vehicle, payable in monthly installments of $648 including interest and is guaranteed by a shareholder. CAPITAL LEASES During May 2006, Momentum Online Computer Services, Inc., entered into a master lease agreement with Agility Lease Fund I, LLC, to fund up to $200,000 in equipment financing, which was subsequently increased in February 2007 an additional $300,000 to a total of $500, 000. Each draw under this agreement will be treated as a separate capital lease to be repaid over 36 months with an effective interest rate of 18%. Included in property and equipment at September 30, 2007, and December 31, 2006 respectively, is $354,000 and $171,000 capitalized equipment, net of amortization. The amount of depreciation at September 30, 2007 and December 31, 2006 respectively, is $88,242 and $26,683 of capitalized equipment. The equipment is the primary collateral securing the financing with a guarantee of repayment by Momentum Online Computer Services, Inc. The following is a schedule by years of future minimum lease payments under capital leases together with the present value of the net minimum lease payments as of September 30, 2007, and December 31, 2006 (in thousands): September 30, December 31, 2007 2006 ------------- ------------ 2007 $ 53 $ 101 2008 204 80 2009 171 53 2010 39 -- 2011 -- -- ------------- ------------ Total minimum lease payments $ 467 $ 234 ------------- ------------ Less amount representing interest (91) (49) Present value of net minimum lease payments 376 185 Current maturities of capital lease obligations (149) (65) ------------- ------------ Long-term portion of capital lease obligations $ 227 $ 120 ============= ============ NOTE 3 - COMMITMENTS AND CONTINGENCIES LEASES AND LICENSE AGREEMENTS For the nine months ended September 30, 2007, and year ended December 31, 2006, rental expenses of approximately $33,540 and $34,002, respectively, were incurred. The Company accounts for rent expense under leases that provide for escalating rentals over the related lease term on a straight-line method. The Company occupies office and tower facilities under several non-cancelable operating lease agreements expiring at various dates through September 2012 and requiring payment of property taxes, insurance, maintenance and utilities. 8 MOMENTUM ONLINE COMPUTER SERVICES, INC. NOTES TO THE FINANCIAL STATEMENTS Future minimum lease payments under non-cancelable operating leases at September 30, 2007, and December 31, 2006 were as follows: Period Ending September 30, December 31, December 31, 2007 2006 -------------------------------------------------- 2007 $ 14,793 $ 55,663 2008 55,221 46,234 2009 52,131 43,839 2010 48,362 41,080 2011 45,087 7,344 2012 14,232 -- ------------ ----------- Total $ 229,826 $ 194,160 ============ =========== NOTE 4 - RELATED PARTY In November 2003, the Company received an advance loan from Robert McClung, CEO non-interest bearing in the amount of $79,000 with $25,000 amount remaining to be paid as of September 30, 2007. In November 2003, the Company received an advance loan from Pat McClung non-interest bearing in the amount of $54,000 with $52,000 amount remaining to be paid as of September 30, 2007. 9 ERF WIRELESS, INC. INTRODUCTION TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS The following unaudited pro forma combined financial statements are based on the historical financial statements of ERF Wireless, Inc. and MOMENTUM ONLINE COMPUTER SERVICES, INC as described in the accompanying notes to the unaudited pro forma combined financial statements. We acquired Momentum on October 17, 2007. The accompanying unaudited pro forma combined balance sheet is presented as if the acquisition of Momentum occurred on September 30, 2007. The unaudited pro forma combined statements of operations for the year ended December 31, 2006 and for the nine months ended September 30, 2007, are presented as if the acquisition of Momentum had occurred on January 1, 2005. All material adjustments to reflect the acquisition and the repayment of the borrowings under the amended credit facility are set forth in the column "Pro Forma Adjustments." The pro forma data is for informational purposes only and may not necessarily reflect future results of operations or financial position or what the results of operations or financial position would have been had ERF Wireless, Inc. and Momentum been operating as combined entities for the periods presented. The unaudited pro forma combined financial statements should be read in conjunction historical financial statements, including the notes thereto, of ERF Wireless, Inc. included in our Form 10-KSB for the year ended December 31, 2006 filed on April 17, 2007, and the historical financial statements included elsewhere in the Form 8-K. 10 PRO FORMA COMBINED BALANCE SHEET SEPTEMBER 30, 2007 ($ in thousands) (UNAUDITED) ERF Wireless Momentum Pro Forma Pro Forma ASSETS (Registrant) (Target) Adjustments Notes Combined ----------- ----------- ----------- ------- ----------- CURRENT ASSETS Cash and cash equivalents $ 938 $ 21 $ -- $ 959 Accounts receivable, net 372 54 -- 426 Inventories 101 8 -- 109 Cost and profit in excess of billings 100 -- -- 100 Prepaid expenses and other 395 -- -- 395 ----------- ----------- ----------- ----------- TOTAL CURRENT ASSETS 1,906 83 -- 1,989 ----------- ----------- ----------- ----------- PROPERTY AND EQUIPMENT Property and equipment 1,633 851 (54) A 2,430 Less accumulated depreciation (398) (418) 418 (398) ----------- ----------- ----------- ----------- TOTAL PROPERTY AND EQUIPMENT 1,235 433 364 2,032 ----------- ----------- ----------- ----------- OTHER ASSETS Goodwill -- -- 356 B 356 Intangible assets, net 164 -- 671 B 835 Other assets 27 46 -- 73 ----------- ----------- ----------- ----------- TOTAL ASSETS $ 3,332 $ 562 $ 1,391 $ 5,285 =========== =========== =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Notes payable and current portion of long-term debt $ 296 $ 49 $ 70 C $ 415 Capital lease current portion of long-term capital lease payable 84 149 -- 233 Accounts payable 462 165 -- C 627 Accrued expenses 662 48 (10) C 700 Derivative liabilities 352 -- -- 352 Deferred liability lease 169 -- -- 169 Billing in excess of cost 121 -- -- 121 Deferred revenue 16 47 -- C 63 ----------- ----------- ----------- ----------- TOTAL CURRENT LIABILITIES 2,162 458 60 2,680 ----------- ----------- ----------- ----------- Advances payable related party -- 77 (77) D -- Long-term debt, net of current portion 2,414 98 160 E 2,672 Capital lease, net of current portion 407 227 -- 634 Deferred liability lease 517 -- -- 517 Deferred revenue 12 -- -- 12 ----------- ----------- ----------- ----------- TOTAL LONG-TERM LIABILITIES 3,350 402 83 3,835 ----------- ----------- ----------- ----------- COMMITMENTS AND CONTINGENT LIABILITIES SHAREHOLDERS' DEFICIT: Preferred stock 3 -- -- 3 Common stock 53 10 (10) F 53 Additional paid in capital 13,827 -- 950 A,G 14,777 Accumulated deficit (16,063) (308) 308 F (16,063) ----------- ----------- ----------- ----------- TOTAL SHAREHOLDERS' DEFICIT (2,180) (298) 1,248 (1,230) ----------- ----------- ----------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT $ 3,332 $ 562 $ 1,391 $ 5,285 =========== =========== =========== =========== See Notes to Unaudited Pro Forma Combined Financial Statements 11 PRO FORMA COMBINED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2007 ($ in thousands, except for per share data) (UNAUDITED) ERF Wireless Momentum Pro Forma Pro Forma (Registrant) (Target) Adjustments Notes Adjustments ----------- ----------- ----------- ------- ----------- SALES: Products $ 1,657 $ 49 $ -- $ 1,706 Services 2,391 850 -- 3,241 Other 117 -- -- 117 ----------- ----------- ----------- ----------- TOTAL SALES 4,165 899 -- 5,064 ----------- ----------- ----------- ----------- COSTS OF GOODS SOLD: Products and integration services 1,736 236 -- 1,972 Rent, repairs and maintenance 138 34 -- 172 Salary and related cost 378 23 -- 401 Depreciation 143 107 -- 250 Other cost 302 -- -- 302 ----------- ----------- ----------- ----------- TOTAL COSTS OF GOODS SOLD: 2,697 400 -- 3,097 ----------- ----------- ----------- ----------- Gross profit 1,468 499 -- 1,967 ----------- ----------- ----------- ----------- Operating expenses: -- Selling, general and administrative 4,465 396 -- 4,861 Depreciation and amortization 203 14 158 H 375 ----------- ----------- ----------- ----------- Total operating expense 4,668 410 158 5,236 ----------- ----------- ----------- ----------- Loss from operations (3,200) 89 (158) (3,269) ----------- ----------- ----------- ----------- OTHER INCOME/(EXPENSE): Interest income 1 -- -- I 1 Interest expense (903) (51) 1 (953) Other income -- 5 -- 5 Gain (loss) on sale of assets (3) -- -- (3) Warrant expense (129) -- -- (129) Derivative (expense) income (202) -- -- (202) ----------- ----------- ----------- ----------- TOTAL OTHER INCOME (EXPENSE) (1,236) (46) 1 (1,281) ----------- ----------- ----------- ----------- NET LOSS $ (4,436) $ 43 $ (157) $ (4,550) =========== =========== =========== =========== NET LOSS PER COMMON SHARE: Basic $ (0.12) $ -- $ -- $ (0.13) Diluted $ (0.12) $ -- $ -- $ (0.13) See Notes to Unaudited Pro Forma Combined Financial Statements 12 ERF WIRELESS, INC PRO FORMA COMBINED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2006 ($ in thousands, except for per share data) (UNAUDITED) ERF Wireless Momentum Pro Forma Pro Forma (Registrant) (Target) Adjustments Notes Adjustments ----------- ----------- ----------- ------- ----------- SALES: Products $ 1,084 $ 103 $ -- $ 1,187 Services 586 1,016 -- 1,602 Other 46 -- -- 46 ----------- ----------- ----------- ----------- TOTAL SALES 1,716 1,119 -- 2,835 ----------- ----------- ----------- ----------- COSTS OF GOODS SOLD: Products and integration services 993 299 -- 1,292 Rent, repairs and maintenance 67 32 -- 99 Salary and related cost 91 61 -- 152 Depreciation 54 66 -- 120 Other cost 59 -- -- 59 ----------- ----------- ----------- ----------- TOTAL COSTS OF GOODS SOLD: 1,264 458 -- 1,722 ----------- ----------- ----------- ----------- Gross profit 452 661 -- 1,113 ----------- ----------- ----------- ----------- Operating expenses: Selling, general and administrative 5,502 556 -- 6,058 Depreciation and amortization 254 21 213 J 488 ----------- ----------- ----------- ----------- Total operating expense 5,756 577 213 6,546 ----------- ----------- ----------- ----------- Loss from operations (5,304) 84 (213) (5,433) ----------- ----------- ----------- ----------- OTHER INCOME/(EXPENSE): Interest income 5 -- -- 5 Interest expense (738) (26) 1 K (763) Loss on extinguishment of debt (48) -- -- (48) Other income -- (4) -- (4) Warrant expense (76) -- -- (76) Derivative (expense) income 929 -- -- 929 ----------- ----------- ----------- ----------- TOTAL OTHER INCOME (EXPENSE) 72 (30) 1 43 ----------- ----------- ----------- ----------- NET LOSS $ (5,232) $ 54 $ (212) $ (5,390) =========== =========== =========== =========== Deemed dividend related to beneficial conversion feature of preferred stock (130) -- -- (130) =========== =========== =========== =========== NET LOSS APPLICABLE TO COMMON SHAREHOLDERS $ (5,362) $ 54 $ (212) $ (5,520) =========== =========== =========== =========== NET LOSS PER COMMON SHARE: Basic $ (0.37) $ -- $ -- $ (0.38) Diluted $ (0.37) $ -- $ -- $ (0.38) See Notes to Unaudited Pro Forma Combined Financial Statements 13 ERF WIRELESS, INC NOTES TO THE UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 1 - PURCHASE PRICE On October 18, 2007, ERFW Wireless, Inc (ERFW) completed the purchase of assets from Momentum Online Computer Services Inc. under the Asset Purchase Agreement dated October 17, 2007. Under the Asset Purchase Agreement, ERFW acquired the wireless internet service provider ("WISP"), which includes all of the current customers and network infrastructure equipment of and approximately 33 tower locations. The acquisition will also increase the Company's footprint in central Texas and will lead to expansion of the Central Texas WiNet and US-BankNet System reaching 36 regional and community bank charters aggregating 462 branch locations. At the time of the transaction, there were no material relationships between the seller and ERFW or any of its affiliates, or any director or officer of ERFW, or any associate of any such officer or director. ERFW paid $1,200,000 in cash, notes and securities and assumed $250,000 in current liabilities and $503,000 in note payables. The purchase price allocation is as follows (in thousands): Cash $ 21 Accounts receivable 54 Inventory 8 Deposits 46 Property and equipment 797 Goodwill 356 Identifiable intangible assets 671 Accounts payable and accrued expenses (203) Deferred revenue (47) Capital leases (376) Note payable (127) ----------- Total adjusted purchase price $ 1,200 =========== The amount allocated to identifiable intangible assets was determined by the company's management. Other intangibles assets are being amortized over their useful life in accordance with the guidance contained in the Financial Accounting Standards Board ("FASB") Statement of Financial Accounting Standard No. 142 ("SFAS 142") "Goodwill and Other Intangible Assets". Goodwill $ 356 Non-compete agreement 85 Customer relationships 586 ----------- Total identifiable intangible assets $ 1,027 =========== 14 ERF WIRELESS, INC NOTES TO THE UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 2 - PRO FORMA ADJUSTMENTS TO THE COMBINE CONSOLIDATED FINANCIAL STATEMENTS PRO FORMA COMBINED BALANCE SHEET AT SEPTEMBER 30, 2007: A. Property and equipment - to adjust Momentum property and equipment to estimated fair market value at acquisition and certain equipment not acquired. B. Goodwill and Intangible assets - Momentum acquisition, to record the identifiable Goodwill and intangible assets acquired in the Momentum transaction. C. Short-term liabilities and other accrued liabilities - to eliminate all Momentum short-term liabilities not assumed by ERF wireless Inc. and to record the short term portion $250,000 note in accordance under the asset purchase agreement. Also to adjust accrued liabilities acquired from Momentum to fair market value of liabilities acquired. D. Advances payable related party - to eliminate related party payables not assumed by ERF wireless Inc. E. Long-term liabilities - to eliminate all Momentum long-term liabilities not assumed by ERF Wireless Inc. and to record long-term portion $250,000 note in accordance under the asset purchase agreement. F. Stockholders' equity to eliminate all Momentum stockholders' equity. G. Additional paid in capital - to record restricted stock issued for the acquisition of Momentum. PRO FORMA COMBINED STATEMENT OF OPERATIONS FOR NINE MONTHS ENDED SEPTEMBER 30, 2007: H. Operating expense, depreciation and amortization expense - Increased by $168,000 related to the amortization of intangible assets from the Momentum acquisition reduced by $10,000 for certain equipment not acquired. I. Interest expense - eliminate interest for debt not acquired by ERF Wireless Inc. PRO FORMA COMBINED STATEMENT OF OPERATIONS FOR YEAR ENDED DECEMBER 31, 2006: J. Operating expense, depreciation and amortization expense - Increased by $224,000 related to the amortization of intangible assets from the Momentum acquisition reduced by $11,000 for certain equipment not acquired. K. Interest expense - eliminate interest for debt and not acquired by ERF Wireless Inc. 15